Personal finance experts love to discuss safe payout rates – the amount a retiree can withdraw from a portfolio each year without depleting it too quickly. I agree this is an important issue. In fact, I’ve brought it up a few times myself in the past few months.
In July I discussed the well-known 4% rule. A few weeks ago I described an alternative called the bucket strategy. But when creating your retirement plan, payout rates shouldn’t be the only consideration. Here are six additional, often overlooked, topics to consider.
Read: It’s Never Too Late to Have a Happy Retirement
1. Time allocation. How do you spend your time after you retire? This may not be a financial question. But the way you manage your time has an impact on both your income and your expenses.
On the income side, do you imagine a classic retirement, i.e. the complete cessation of gainful employment, or would you like to reduce yourself to part-time, maybe take a new job or start a small business? I once knew a guy who worked part-time in a marina that pumped gasoline. It seemed like an odd choice for a wealthy retiree. But he loved the water, it was an opportunity to socialize and it brought additional income.
This may seem like an idiosyncratic example, but it illustrates a more general reality: that retirement doesn’t have to be a binary decision. Sure, some people switch from the office to the hammock overnight. But it’s not always like that. I’ve seen just as many people shut down for five to seven years before fully retiring. There is no one size fits all.
On the cost side, housing is usually the largest variable. Do you think you will stay in your current home, downsize, or maybe buy or rent a vacation home? How do you see this change over time? Over the summer, I met a neighbor who described Florida “surviving”. It turns out he had bought an apartment in Florida when he retired in his 60s. For 20 years he enjoyed the winters there and the summers in the north. But over time, his preferences have changed. He was tired of traveling back and forth and wanted to cut his expenses too, so he consolidated himself back into a single home.
Strategies like the 4% rule assume that a retiree’s portfolio withdrawals are the same every year and only increase with inflation. But for most people, that’s probably not true, as these examples illustrate. This is why timing is such an important pillar of any financial plan. Everyone’s pension income and expenditure go through different phases. In your 50s, can you predict where you will be in your 80s? No. There are a number of options worth considering when creating your plan.
2. Income taxes. You typically have much more control over your tax bill in retirement than in your years of work. In the past, I’ve discussed Roth conversions and other strategies to help shape your retirement tax bill. These strategies may or may not work for you.
But what every retiree should be aware of is the manner in which withdrawals are made to finance living expenses. Let’s say you have some money in a taxable account, some in a tax-deferred account, and some in a Roth IRA. In what order should you tap into these accounts each year? This should be an important part of your planning process so that your tax bill isn’t left to chance.
3. Debt. Do you have a mortgage or other credit? If possible, I recommend retiring without significant debt – for two reasons. There is the benefit of calm. Additionally, the cash flow flexibility gained from being debt free makes it easy for you to control your taxes in the ways described above. One exception: if you have a home equity line of credit that you use for rainy days, you may want to extend it while you are still working. It will be infinitely easier to get admission while you still have a steady income.
4. Family. If you find yourself in the “sandwich generation” where both children and parents need help, it can affect where you live. This will likely affect your timing as well. Making predictions in this area can be difficult. But here, too, it is worthwhile to think through the range of options and their effects on your finances.
5. Estate planning. When it comes to planning for the next generation, I’ve found that every family is different. Some want to leave every dollar possible for their children, while others don’t mind if their estate ends up writing a check to the government. Other families have more specific considerations, such as a child in need of long-term care. Probably because it’s not such an uplifting topic, many people hesitate when it comes to estate planning. But it’s worth doing it on purpose, for the same reason you want to be intentional with income tax – to avoid an outcome you didn’t want.
Read: How To Give Your Heirs Quick Access To Your Bank Accounts In The Event Of Death
6. Mechanics and mindset. I have heard more than one person say that they are concerned about the prospect of retirement. Even when new retirees know that there is enough money in the bank, thinking about siphoning off those assets can be frightening. For this reason, it pays to think not only about the math of portfolio withdrawals, but also the mechanics.
I usually recommend setting up automatic transfers from retirees’ investment accounts to their bank accounts. This helps to recreate the feel of a paycheck, which makes budgeting easier. Perhaps more importantly, it can alleviate some of the anxieties associated with withdrawals. To be on the safe side, you should check the level of your pension regularly. Even so, I think it’s best to automate as much as possible. This way, you can avoid being deliberate and ambiguous every time you need to make a withdrawal.
This column originally appeared on Humble Dollar. It was republished with permission.
Adam M. Grossman is the founder of Mayport, a fixed fee asset management company. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman, and read his previous articles.